Keep an eye on the shadow banking system – it is about to be shaken to the core. According to the Financial Stability Board, the size of the global shadow banking system has reached an astounding 75 trillion dollars. It has approximately tripled in size since 2002. In the U.S. alone, the size of the shadow banking system is approximately 24 trillion dollars. At this point, shadow banking assets in the United States are even greater than those of conventional banks. These shadow banks are largely unregulated, but governments around the world have been extremely hesitant to crack down on them because these nonbank lenders have helped fuel economic growth. But in the end, we will all likely pay a very great price for allowing these exceedingly reckless financial institutions to run wild.
If you are not familiar with the “shadow banking system”, the following is a pretty good definition from investing answers.com…
The shadow banking system (or shadow financial system) is a network of financial institutions comprised of non-depository banks — e.g., investment banks, structured investment vehicles (SIVs), conduits, hedge funds, non-bank financial institutions and money market funds.
How it works/Example:
Shadow banking institutions generally serve as intermediaries between investors and borrowers, providing credit and capital for investors, institutional investors, and corporations, and profiting from fees and/or from the arbitrage in interest rates.
Because shadow banking institutions don’t receive traditional deposits like a depository bank, they have escaped most regulatory limits and laws imposed on the traditional banking system. Members are able to operate without being subject to regulatory oversight for unregulated activities. An example of an unregulated activity is a credit default swap (CDS).
These institutions are extremely dangerous because they are highly leveraged and they are behaving very recklessly. They played a major role during the financial crisis of 2008, and even the New York Fed admits that shadow banking has “increased the fragility of the entire financial system”…
The current financial crisis has highlighted the growing importance of the “shadow banking system,” which grew out of the securitization of assets and the integration of banking with capital market developments. This trend has been most pronounced in the United States, but it has had a profound influence on the global financial system. In a market-based financial system, banking and capital market developments are inseparable: Funding conditions are closely tied to fluctuations in the leverage of market-based financial intermediaries. Growth in the balance sheets of these intermediaries provides a sense of the availability of credit, while contractions of their balance sheets have tended to precede the onset of financial crises. Securitization was intended as a way to transfer credit risk to those better able to absorb losses, but instead it increased the fragility of the entire financial system by allowing banks and other intermediaries to “leverage up” by buying one another’s securities.
Over the past decade, shadow banking has become a truly worldwide phenomenon, and thus it is a major threat to the entire global financial system. In China, shadow banking has been growing by leaps and bounds, but this has the authorities deeply concerned. In fact, according to Bloomberg one top Chinese regulator has referred to shadow banking as a “Ponzi scheme”…
Their growth had caused the man who is now China’s top securities regulator to label the off-balance-sheet products a “Ponzi scheme,” because banks have to sell more each month to pay off those that are maturing.
And what happens to all Ponzi schemes eventually?
In the end, they always collapse.
And when this 75 trillion dollar Ponzi scheme collapses, the global devastation that it will cause will be absolutely unprecedented.
Bond expert Bill Gross, who is intimately familiar with the shadow banking system, has just come out with a major warning about the lack of liquidity in the shadow banking system…
Mutual funds, hedge funds, and ETFs, are part of the “shadow banking system” where these modern “banks” are not required to maintain reserves or even emergency levels of cash. Since they in effect now are the market, a rush for liquidity on the part of the investing public, whether they be individuals in 401Ks or institutional pension funds and insurance companies, would find the “market” selling to itself with the Federal Reserve severely limited in its ability to provide assistance.
As far as shadow banking is concerned, everything is just fine as long as markets just keep going up and up and up.
But once they start falling, the whole system can start falling apart very rapidly. Here is more from Bill Gross on what might cause a “run on the shadow banks” in the near future…
Long used to the inevitability of capital gains, investors and markets have not been tested during a stretch of time when prices go down and policymakers’ hands are tied to perform their historical function of buyer of last resort. It’s then that liquidity will be tested.
And what might precipitate such a “run on the shadow banks”?
1) A central bank mistake leading to lower bond prices and a stronger dollar.
2) Greece, and if so, the inevitable aftermath of default/restructuring leading to additional concerns for Eurozone peripherals.
3) China – “a riddle wrapped in a mystery, inside an enigma”. It is the “mystery meat” of economic sandwiches – you never know what’s in there. Credit has expanded more rapidly in recent years than any major economy in history, a sure warning sign.
4) Emerging market crisis – dollar denominated debt/overinvestment/commodity orientation – take your pick of potential culprits.
5) Geopolitical risks – too numerous to mention and too sensitive to print.
6) A butterfly’s wing – chaos theory suggests that a small change in “non-linear systems” could result in large changes elsewhere. Call this kooky, but in a levered financial system, small changes can upset the status quo. Keep that butterfly net handy.
Should that moment occur, a cold rather than a hot shower may be an investor’s reward and the view will be something less than “gorgeous”. So what to do? Hold an appropriate amount of cash so that panic selling for you is off the table.
In order to avoid a shadow banking crisis, what we need is for global financial markets to stabilize and to resume their upward trends.
If stocks and bonds start crashing, which is precisely what I have projected will happen during the last half of 2015, the shadow banking system is going to come under an extreme amount of stress. If the coming global financial crisis is even half as bad as I believe it is going to be, there is no way that the shadow banking system is going to hold up.
So let’s hope that the financial devastation that we have seen so far this week is not a preview of things to come. The global financial system has been transformed into a delicately balanced pyramid of glass that is not designed to handle turbulent times. We should have never allowed the shadow banks to run wild like this, but we did, and now in just a short while we are going to get to witness a financial implosion unlike anything the world has ever seen before.
Corporations, individuals and the federal government continue to rack up debt at a rate that is far faster than the overall rate of economic growth. We are literally drowning in red ink from sea to shining sea, and yet we just can’t help ourselves. Consumer credit has doubled since the year 2000. Student loan debt has doubled over the course of the past decade. Business debt has doubled since 2006. And of course the debt of the federal government has doubled since 2007. Anyone that believes that this is “sustainable” in any way, shape or form is crazy. We have accumulated the greatest mountain of debt that the world has ever seen, and yet despite all of the warnings we just continue to race forward into financial oblivion. There is no possible way that this is going to end well.
Just the other day, a financial story that USA Today posted really got my attention. It contained charts and graphs that showed that business debt in the U.S. had doubled since 2006. I knew that things were bad, but I didn’t know that they were this bad. Back in 2006, just prior to the last major economic downturn, U.S. nonfinancial companies had a total of about 2.6 trillion dollars of debt. Now, that total has skyrocketed to 5.8 trillion…
Companies are sitting on a record $1.82 trillion in cash. That might sound impressive until you hear companies owe three times more – $5.8 trillion, according to a new report from Standard & Poor’s Ratings Services.
Debt levels are soaring at U.S. non-financial companies so quickly – total debt outstanding rose $650 billion in 2014, which is six times faster than the $100 billion in added cash.
So are we in better condition to handle an economic crisis than we were the last time, or are we in worse shape?
Let’s look at another category of debt. According to new data that just came out, the total amount of student loan debt in the U.S. is up to a staggering 1.2 trillion dollars. That total has more than doubled over the past decade…
New data released by The Associated Press shows student loan debt is over $1.2 trillion, which is more than double the amount of a decade ago.
Students are facing an average of $35,000 in debt, that’s the highest of any graduating class in U.S. history. A senior at University of Colorado, Colorado Springs, Jon Cheek, knows the struggle first hand.
“It’s been a pretty big concern, I work while I go to school. I applied for a bunch of scholarships and done everything I can to try and keep it low,” said Cheek.
And of course it isn’t just student loan debt. American consumers have had a love affair with debt that stretches back for decades. As the chart below demonstrates, overall consumer credit has more than doubled since the year 2000…
If our paychecks were increasing at this same pace, that would be one thing. But they aren’t. In fact, real median household income is actually lower today than it was just prior to the last economic crisis.
So American households should actually be cutting back on debt. But instead, they are just piling on more debt, and the financial predators are becoming even more creative. In a previous article, I discussed how many auto loans are now being stretched out for seven years. At this point, the number of auto loans that exceed 72 months is at an all-time high…
The average new car loan has reached a record 67 months, reports Experian, the Ireland-based information-services company. The percentage of loans with terms of 73 to 84 months also reached a new high of 29.5% in the first quarter of 2015, up from 24.9% a year earlier.
Long-term used-vehicle loans also broke records with loan terms of 73 to 84 months reaching 16% in the first quarter 2015, up from 12.94% — also the highest on record.
When will we learn?
The crash of 2008 should have been a wake up call.
We should have acknowledged our mistakes and we should have started doing things very differently.
But instead, we just kept on making the exact same mistakes. In fact, our long-term financial problems have continued to accelerate since the last recession. Just look at what has happened to our national debt. Just prior to the last recession, the U.S. national debt was sitting at approximately 9 trillion dollars. Today, it is over 18 trillion dollars…
Our debt has grown so large that we will never be able to get out from under it. This is something that I covered in my recent article entitled “It Is Mathematically Impossible To Pay Off All Of Our Debt“. Because of our recklessness, our children, our grandchildren and all future generations of Americans are consigned to a lifetime of debt slavery. What we have done to them is beyond criminal. If we lived in a just society, a whole bunch of people would be going to prison for the rest of their lives over this.
During fiscal year 2014, the debt of the federal government increased by more than a trillion dollars. But in addition to that, the federal government has more than seven trillion dollars of debt that must be “rolled over” every year. In other words, the government must issue more than seven trillion dollars of new debt just to pay off old debts that are coming due.
As long as the rest of the world continues to lend us enormous mountains of money at ridiculously low interest rates, we can continue to keep our heads above the water. But this can change at any time. And once it does, interest rates will rise. If the average rate of interest on U.S. government debt was to return to the long-term average, we would very quickly find ourselves spending more than a trillion dollars a year just on interest on the national debt.
The debt-fueled prosperity that we are enjoying now is not real. It is a false prosperity that has been purchased by selling future generations into debt slavery. We have mortgaged the future to make our own lives better.
We are addicts. We are addicted to debt, and no matter how many warnings we receive, we just can’t help ourselves.
Shame on you America.
If U.S. economic growth falls any lower, we are officially going to be in recession territory. On Wednesday, we learned that U.S. GDP grew at a 0.2 percent annual rate in the first quarter of 2015. That was much lower than all of the “experts” were projecting. And of course there are all sorts of questions whether the GDP numbers the government feeds us are legitimate anyway. According to John Williams of shadowstats.com, if honest numbers were used they would show that U.S. GDP growth has been continuously negative since 2005. But even if we consider the number that the government has given us to be the “real” number, it still shows that the U.S. economy has stalled out. It is almost as if we have hit a “turning point”, and there are many out there (including myself) that believe that the next major economic downturn is dead ahead. As you will see in this article, a whole bunch of things are happening right now that we would expect to see if a recession was beginning. The following are 16 signs that the economy has stalled out and the next economic downturn is here…
#1 We just learned that U.S. GDP grew at an anemic 0.2 percent annual rate during the first quarter of 2015…
The gross domestic product grew between January and March at an annualized rate of 0.2 percent, the U.S. Commerce Department said, adding to the picture of an economy braking sharply after accelerating for much of last year. The pace fell well shy of the 1 percent mark anticipated by analysts and marked the weakest quarter in a year.
#2 If you strip a very unusual inventory buildup out of the GDP number, U.S. GDP would have actually fallen at a -2.5 percent annual rate during the first quarter…
The only good news: the massive inventory build, the largest since 2010, boosted GDP by nearly 3.0%. Without this epic stockpiling of non-farm inventory which will have to be liquidated at some point (and at a very low price) Q1 GDP would have been -2.5%.
#3 Our trade deficit with the rest of the planet is absolutely killing our economic growth. According to the Reality Chek Blog, U.S. economic growth would have been a total of 8 percent higher since the end of the last recession if we actually had balanced trade with other nations…
As of the new first quarter figures, the worsening of the trade deficit has reduced the cumulative real growth of the U.S. economy by 7.99 percent since the current recovery began in the second quarter of 2009.
#4 According to numbers that were just released by the Bureau of Labor Statistics, in one out of every five American families nobody has a job. So how in the world can the “unemployment rate” be sitting at “5.5 percent” when everyone is unemployed in 20 percent of all families in the United States? It doesn’t make any sense.
#5 The rate of homeownership in the United States has just hit a brand new 25 year low. How can anyone claim that the middle class is “healthy” when the percentage of Americans that own a home is the lowest that it has been in more than two decades?
#6 Back in 2013, 31 percent of all Americans said that they did not anticipate buying a home “for the foreseeable future”. Just two years later, that number has risen to 41 percent.
#7 The student loan bubble is clearly bursting. According to Bloomberg, only 37 percent of all student loan borrowers are actually up to date on their payments and reducing their balances…
With borrowers increasingly struggling to repay their student loans, Moody’s Investors Service is warning it may take investors longer than promised to get their money back. The credit grader said this month it may lower rankings on $3 billion of top-rated debt as investors face the threat of slowing principal payments or even receiving no interest.
The concern underscores the fallout from a record $1.2 trillion in U.S. student loans that’s spreading to everything from the housing market and consumer spending to taxpayers. As a sluggish economic recovery forces borrowers to miss payments or tap relief programs, only 37 percent are current and reducing their balances, according to a Federal Reserve Bank of New York presentation this month.
#8 Procter & Gamble has announced that it will be cutting up to 6,000 more jobs from their payroll. Why would they be doing this if the economy is “getting better”?
#9 McDonald’s plans to permanently shut down 700 “poorly performing” restaurants over the course of 2015. Why would they be doing this if the economy is “getting better”?
#10 It is being projected that half of all fracking companies in the United States will be either “dead or sold” by the end of 2015.
#11 Retail sales in the U.S. have not dropped this rapidly since the last recession.
#12 Wholesale sales in the U.S. have not dropped this rapidly since the last recession.
#13 Factory orders in the U.S. have not dropped this rapidly since the last recession.
#14 Credit requests are being declined at a rate that we haven’t seen since the last recession.
#15 U.S. export growth has gone negative for the first time since the last recession.
#16 As the U.S. economy begins to head into another downturn, most Americans are completely unprepared for it. In fact, one recent survey discovered that 62 percent of all Americans are currently living paycheck to paycheck.
Don’t let this next recession take you by surprise.
Back in 2008 and 2009, millions of Americans suddenly lost their jobs or businesses because of the sharp economic downturn. Because most of them were living paycheck to paycheck, all of a sudden a whole lot of Americans could not make their mortgage payments and foreclosures surged to unprecedented heights. Millions of families that thought they were operating on a solid foundation saw their middle class lifestyles evaporate in just a matter of a few months.
That is why it is so vital to prepare yourself financially, mentally, emotionally, physically and spiritually for the great storm that is coming ahead of time. Over the past couple of years, I have been working on a new book entitled “Get Prepared Now” which talks about how to make these preparations. On Wednesday, it was finally released to the public. I hope that you will check it out.
The past few years have been a period of relative stability for the U.S. economy. A lot of people have been lulled into a false sense of security during that time. These people have become convinced that our problems have been fixed. But they haven’t been fixed at all. In fact, our problems are far, far worse than they were just prior to the last financial crisis.
When the next great financial crisis strikes, we are going to see a spike in the suicide rate just like we did during the last one. Millions will be blindsided by what is coming and will give in to depression and despair. But that doesn’t have to happen to you. It is empowering to know what is coming and to understand why it is coming. It is empowering to get prepared in advance for turbulent times. It is empowering to have a plan for the years ahead.
Even though I write about all of the horrible things that are coming to this country every day, I live my life with no fear, and that is what I want for all of you as well.
Do you want to know who will be giving in to fear and panic when things start to go really crazy?
It will be the people that had no idea what was coming and made no preparations whatsoever.
Yes, the times ahead are going to be extremely challenging, but they can also be the best times of your life.
It is all going to come down to how you respond to a world that is going completely insane.
The choice is up to you.
Get ready for another major worldwide credit crunch. Today, the entire global financial system resembles a colossal spiral of debt. Just about all economic activity involves the flow of credit in some way, and so the only way to have “economic growth” is to introduce even more debt into the system. When the system started to fail back in 2008, global authorities responded by pumping this debt spiral back up and getting it to spin even faster than ever. If you can believe it, the total amount of global debt has risen by $35 trillion since the last crisis. Unfortunately, any system based on debt is going to break down eventually, and there are signs that it is starting to happen once again. For example, just a few days ago the IMF warned regulators to prepare for a global “liquidity shock“. And on Friday, Chinese authorities announced a ban on certain types of financing for margin trades on over-the-counter stocks, and we learned that preparations are being made behind the scenes in Europe for a Greek debt default and a Greek exit from the eurozone. On top of everything else, we just witnessed the biggest spike in credit application rejections ever recorded in the United States. All of these are signs that credit conditions are tightening, and once a “liquidity squeeze” begins, it can create a lot of fear.
Over the past six months, the Chinese stock market has exploded upward even as the overall Chinese economy has started to slow down. Investors have been using something called “umbrella trusts” to finance a lot of these stock purchases, and these umbrella trusts have given them the ability to have much more leverage than normal brokerage financing would allow. This works great as long as stocks go up. Once they start going down, the losses can be absolutely staggering.
That is why Chinese authorities are stepping in before this bubble gets even worse. Here is more about what has been going on in China from Bloomberg…
China’s trusts boosted their investments in equities by 28 percent to 552 billion yuan ($89.1 billion) in the fourth quarter. The higher leverage allowed by the products exposes individuals to larger losses in the event of stock-market drops, which can be exaggerated as investors scramble to repay debt during a selloff.
In umbrella trusts, private investors take up the junior tranche, while cash from trusts and banks’ wealth-management products form the senior tranches. The latter receive fixed returns while the former take the rest, so private investors are effectively borrowing from trusts and banks.
Margin debt on the Shanghai Stock Exchange climbed to a record 1.16 trillion yuan on Thursday. In a margin trade, investors use their own money for just a portion of their stock purchase, borrowing the rest. The loans are backed by the investors’ equity holdings, meaning that they may be compelled to sell when prices fall to repay their debt.
Overall, China has seen more debt growth than any other major industrialized nation since the last recession. This debt growth has been so dramatic that it has gotten the attention of authorities all over the planet…
Wolfgang Schaeuble, Germany’s finance minister says that “debt levels in the global economy continue to give cause for concern.”
Singling out China in particular, Schaeuble noted that “debt has nearly quadrupled since 2007″, adding that it’s “growth appears to be built on debt, driven by a real estate boom and shadow banks.”
According to McKinsey’s research, total outstanding debt in China increased from $US7.4 trillion in 2007 to $US28.2 trillion in 2014. That figure, expressed as a percentage of GDP, equates to 282% of total output, higher than the likes of other G20 nations such as the US, Canada, Germany, South Korea and Australia.
This credit boom in China has been one of the primary engines for “global growth” in recent years, but now conditions are changing. Eventually, the impact of what is going on in China right now is going to be felt all over the planet.
Over in Europe, the Greek debt crisis is finally coming to a breaking point. For years, authorities have continued to kick the can down the road and have continued to lend Greece even more money.
But now it appears that patience with Greece has run out.
For instance, the head of the IMF says that no delay will be allowed on the repayment of IMF loans that are due next month…
IMF Managing Director Christine Lagarde roiled currency and bond markets on Thursday as reports came out of her opening press conference saying that she had denied any payment delay to Greece on IMF loans falling due next month.
Unless Greece concludes its negotiations for a further round of bailout money from the European Union, however, it is not likely to have the money to repay the IMF.
And we are getting reports that things are happening behind the scenes in Europe to prepare for the inevitable moment when Greece will finally leave the euro and go back to their own currency.
For example, consider what Art Cashin told CNBC on Friday…
First, “there were reports in the media [saying] that the ECB and/or banking authorities suggested to banks to get rid of any sovereign Greek debt they had, which suggests that maybe the next step will be Greece exiting,” Cashin told CNBC.
Also, one of Greece’s largest newspapers is reporting that neighboring countries are forcing subsidiaries of Greek banks that operate inside their borders to reduce their risk to a Greek debt default to zero…
According to a report from Kathimerini, one of Greece’s largest newspapers, central banks in Albania, Bulgaria, Cyprus, Romania, Serbia, Turkey and the Former Yugoslav Republic of Macedonia have all forced the subsidiaries of Greek banks operating in those countries to bring their exposure to Greek risk — including bonds, treasury bills, deposits to Greek banks, and loans — down to zero.
Once Greece leaves the euro, that is going to create a tremendous credit crunch in Europe as fear begins to spread like wildfire. Everyone will be wondering which nation will be “the next Greece”, and investors will want to pull their money out of perceived danger zones before they get hammered.
In the past, other European nations have been willing to bend over backwards to accommodate Greece and avoid this kind of mess, but those days appear to be finished. In fact, the finance minister of France openly admits that the French “are not sympathetic to Greece”…
Greece isn’t winning much sympathy from its debt-wracked European counterparts as the country draws closer to default for failing to make bailout repayments.
“We are not sympathetic to Greece,” French Finance Minister Michael Sapin said in an interview at the International Monetary Fund-World Bank spring meetings here.
“We are demanding because Greece must comply with the European (rules) that apply to all countries,” Sapin said.
Yes, it is possible that another short-term deal could be reached which could kick the can down the road for a few more months.
But either way, things in Europe are going to continue to get worse.
Meanwhile, very disappointing earnings reports in the U.S. are starting to really rattle investors.
For example, we just learned that GE lost 13.6 billion dollars in the first quarter…
One week following the announcement that it would dismantle most of its GE Capital financing operations to instead focus on its industrial roots, General Electric reported a first quarter loss of $13.6 billion.
The results were impacted by charges relating to the conglomerate’s strategic shift. A year ago GE reported a first quarter profit of $3 billion.
That is a lot of money.
How in the world does a company lose 13.6 billion dollars in a single quarter during an “economic recovery”?
Other big firms are reporting disappointing earnings numbers too…
In earnings news, American Express Co. late Thursday said its results were hurt by the strong U.S. dollar, which reduced revenue booked in other countries. Chief Executive Kenneth Chenault reiterated the company’s forecast that 2015 earnings will be flat to modestly down year over year. Shares fell 4.6%.
Advanced Micro Devices Inc. said its first-quarter loss widened as revenue slumped. The company said it was exiting its dense server systems business, effective immediately. Revenue and the loss excluding items missed expectations, pushing shares down 13%.
And just like we saw just before the financial crisis of 2008, Americans are increasingly having difficulty meeting their financial obligations.
For instance, the delinquency rate on student loans has reached a very frightening level…
More borrowers are failing to make payments on their student loans five years after leaving college, painting a grim picture for borrowers, according to the Federal Reserve Bank of New York.
Student debt continues to increase, especially for people who took out loans years ago. Those who left school in the Great Recession, which ended in 2009, had particular difficulty with repayment, with many defaulting, becoming seriously delinquent or not being able to reduce their balances, the New York Fed said today.
Only 37 percent of borrowers are current on their loans and are actively paying them down, and 17 percent are in default or in delinquency.
At this point, the American consumer is pretty well tapped out. If you can believe it, 56 percent of all Americans have subprime credit today, and as I mentioned above, we just witnessed the biggest spike in credit application rejections ever recorded.
We have reached a point of debt saturation, and the credit crunch that is going to follow is going to be extremely painful.
Of course the biggest provider of global liquidity in recent years has been the Federal Reserve. But with the Fed pulling back on QE, this is creating some tremendous challenges all over the globe. The following is an excerpt from a recent article in the Telegraph…
The big worry is what will happen to Russia, Brazil and developing economies in Asia that borrowed most heavily in dollars when the Fed was still flooding the world with cheap liquidity. Emerging markets account to roughly half of the $9 trillion of offshore dollar debt outside US jurisdiction.
The IMF warned that a big chunk of the debt owed by companies is in the non-tradeable sector. These firms lack “natural revenue hedges” that can shield them against a double blow from rising borrowing costs and a further surge in the dollar.
So what is the bottom line to all of this?
The bottom line is that we are starting to see the early phases of a liquidity squeeze.
The flow of credit is going to begin to get tighter, and that means that global economic activity is going to slow down.
This happened during the last financial crisis, and during this next financial crisis the credit crunch is going to be even worse.
This is why it is so important to have an emergency fund. During this type of crisis, you may have to be the source of your own liquidity. At a time when it seems like nobody has any cash, those that do have some will be way ahead of the game.
How would America ever survive without the central planners in the Obama administration and at the Federal Reserve? What in the world would we do if there was no income tax and no IRS? Could the U.S. economy possibly keep from collapsing under such circumstances? The mainstream media would have us believe that unless we have someone “to pull the levers” our economy would descend into utter chaos, but the truth is that the best period of economic growth in U.S. history occurred during a time when there was no income tax and no Federal Reserve. Between the Civil War and 1913, the U.S. economy experienced absolutely explosive growth. The free market system thrived and the rest of the world looked at us with envy. The federal government was very limited in size, there was no income tax for most of that time and there was no central bank. To many Americans, it would be absolutely unthinkable to have such a society today, but it actually worked very, very well. Without the inventions and innovations that came out of that period, the world would be a far different place today.
It is amazing what can happen when the government just gets out of the way. Check out all of the wonderful things that Wikipedia says happened for the U.S. economy during those years…
The rapid economic development following the Civil War laid the groundwork for the modern U.S. industrial economy. By 1890, the USA leaped ahead of Britain for first place in manufacturing output.
An explosion of new discoveries and inventions took place, a process called the “Second Industrial Revolution.” Railroads greatly expanded the mileage and built stronger tracks and bridges that handled heavier cars and locomotives, carrying far more goods and people at lower rates. Refrigeration railroad cars came into use. The telephone, phonograph, typewriter and electric light were invented. By the dawn of the 20th century, cars had begun to replace horse-drawn carriages.
Parallel to these achievements was the development of the nation’s industrial infrastructure. Coal was found in abundance in the Appalachian Mountains from Pennsylvania south to Kentucky. Oil was discovered in western Pennsylvania; it was mainly used for lubricants and for kerosene for lamps. Large iron ore mines opened in the Lake Superior region of the upper Midwest. Steel mills thrived in places where these coal and iron ore could be brought together to produce steel. Large copper and silver mines opened, followed by lead mines and cement factories.
In 1913 Henry Ford introduced the assembly line, a step in the process that became known as mass-production.
When hard working, industrious people are given freedom to pursue their dreams, great things tend to happen. The truth is that we were all designed to create, to invent, to build, and to trade with one another. We all have something that we can contribute to society, and when families are strong and the invisible hand of the free market is allowed to work, societies tend to prosper.
It is not a coincidence that the greatest period of economic growth in U.S. history was between the Civil War and 1913. The following information comes from Wikipedia…
The Gilded Age saw the greatest period of economic growth in American history. After the short-lived panic of 1873, the economy recovered with the advent of hard money policies and industrialization. From 1869 to 1879, the US economy grew at a rate of 6.8% for real GDP and 4.5% for real GDP per capita, despite the panic of 1873. The economy repeated this period of growth in the 1880s, in which the wealth of the nation grew at an annual rate of 3.8%, while the GDP was also doubled.
Wouldn’t you like U.S. GDP to double over the course of a decade now?
So why don’t we go back to a system like that?
In 1913, the Federal Reserve and a permanent national income tax were introduced. Today, the unelected central planners at the Federal Reserve totally run our financial system and the U.S. tax code is about 13 miles long. The value of our currency has declined by more than 96 percent since 1913, and the size of our national debt has gotten more than 5000 times larger.
Meanwhile, control freak bureaucrats seemingly run everything. Almost every business decision is heavily influenced either by taxes or by the millions of laws, rules and regulations that are sucking the life out of our economic system.
My favorite example of how suffocating red tape in America has become is the magician out in Missouri that was forced by the Obama administration to submit a 32 page “disaster plan” for the rabbit that he uses during his magic shows for kids.
It is no wonder why we don’t have any economic growth. The central planners in the federal government are killing our economy.
And the central planners over at the Federal Reserve are killing our financial system. In school we are taught that the Fed was created to bring stability to our financial system, but the truth is that they have been responsible for financial bubble after financial bubble, and now Federal Reserve Chairman Ben Bernanke has created the largest bond bubble in the history of the world. When that thing bursts, and it will, we are going to see financial carnage on an unprecedented scale.
Unfortunately, the truth is that the Federal Reserve never has been looking out for the interests of the American people. It was created by the big banks and it has always worked very hard to benefit the big banks. During the Fed era, the big banks have become the most powerful economic entities on the entire planet. Our entire economy is now based on debt, and the big banks are at the very center of this debt spiral. The following is an excerpt from a recent article by Paul B. Farrell…
Today’s world includes four Wall Street banks each with assets over $1 trillion, each more than Goldman. Plus eight other big global banks each have over $2 trillion total assets, including, among the 100 largest, Barclays, HSBC, Deutsche, ICB-China and Japan’s Mitsubishi.
Yes, this new world is changing fast. Back in 2008 the world’s financial banks were in ruins. Wall Street sunk into virtually bankruptcy. Goldman and its Wall Street too-big-to-fail co-conspirators had trashed the global economy, triggered a virtual depression, and Wall Street’s casinos lost over $10 trillion of Main Street retirement funds.
And as we saw back in 2008, the Federal Reserve is going to do whatever is necessary to prop up Wall Street. Most Americans never even heard about this, but during the last financial crisis the Fed secretly loaned 16 trillion dollars to the big banks. Those loans were nearly interest-free and those banks knew that they could get basically as much nearly interest-free money as they wanted from the Fed.
So how much nearly interest-free money did the Fed loan to normal Americans?
Not a single penny.
That would be bad enough, but it is also important to remember that since 2008 the Fed has actually been paying banks NOT to lend money to the rest of us.
What is it going to take for the American people to start demanding that the Fed be abolished? They are absolutely destroying our financial system.
Meanwhile, the central planners in the Obama administration have been doing their part as well. During the second quarter of this year, the number of Americans working between 30 and 34 hours per week fell by 146,500. During that same time period, the number of Americans working between 25 and 29 hours rose by 119,000.
Why is this happening?
Well, the Obamacare employer mandate will apply to workers that work at least 30 hours each week, so employers are starting to cut back on the hours their employees are getting in order to comply with the law.
But this is just one example out of thousands, and most Americans already know that the U.S. economy has been crumbling for many years.
In fact, things have gotten so bad that even 53 percent of all Democrats believe that the American Dream is dead even though Barack Obama is residing in the White House.
But this is just the beginning. Things are going to get much, much worse. We are going down the same path that Greece has gone, and the unemployment rate in Greece has just hit a new all-time record high of 27.6 percent.
That is where the U.S. is headed eventually. Decades of very foolish decisions are catching up with us.
The primary reason why all of this is happening is debt. As a society, we simply have way, way, way too much debt.
The biggest offender, of course, is the federal government. Since 1970, federal spending has grown nearly 12 times as rapidly as median household income has, and since the year 2000 the size of the U.S. national debt has grown by more than 11 trillion dollars.
When government debt gets too large, it has a profoundly negative effect on an economy. The following is an excerpt from an outstanding article by Lacy H. Hunt, a Ph.D. economist…
Here are the studies, starting with the one with the broadest implications:
- “Government Size and Growth: A Survey and Interpretation of the Evidence,” from Journal of Economic Surveys. Published in April 2011, Swedish economists Andreas Bergh and Magnus Henrekson (both of the Research Institute of Industrial Economics at Lund University) found a “significant negative correlation” between size of government and economic growth. Specifically, “an increase in government size by 10 percentage points is associated with a 0.5% to 1% lower annual growth rate.”
- “The Impact of High and Growing Government Debt on Economic Growth: An Empirical Investigation for the Euro Area,” in European Central Bank working paper, Number 1237, August 2010. Cristina Checherita and Philipp Rother found that a government-debt-to-GDP ratio above the threshold of 90-100% has a “deleterious” impact on long-term growth. Additionally, the impact of debt on growth is nonlinear – as the government debt rises to higher and higher levels, the adverse growth consequences accelerate.
- The Real Effects of Debt, published by the Bank for International Settlements (BIS) in Basel, Switzerland in August 2011. Stephen G. Cecchetti, M. S.Mohanty, and Fabrizio Zampolli determined that “beyond a certain level, debt is bad for growth. For government debt, the number is about 85% of GDP.”
- “Public Debt Overhangs: Advanced-Economy Episodes Since 1800,”by Carmen M. Reinhart, Vincent R. Reinhart, Kenneth S. Rogoff, Journal of Economic Perspectives, Volume 26, Number 3, Summer 2012, pages 69-86. The authors identified 26 cases of “debt overhangs,” which they define as public-debt-to-GDP levels exceeding 90% for at least five years. In spite of the many idiosyncratic differences in these situations, economic growth fell in all but three of the 26 cases. All of the instances, which lasted an average of 23 years, are included in the paper. They found that average annual growth is 1.2% lower for countries with a debt overhang than for countries without. The long duration of such episodes means that cumulative shortfall from the debt excess—i.e., several years in a row of subpar economic growth—is potentially massive.
But it isn’t just federal government debt that is the problem. The rest of us have way too much debt as well.
If you can believe it, the ratio of private debt to GDP was 273.3% for the twelve months ending in the first quarter of 2013.
That is an astounding figure.
And as Hunt explained, having too much private debt is also very bad for an economy…
In Too Much Finance, published by the United Nations Conference on Trade and Development (UNCTAD) in March 2011, Jean Louis Arcand, Enrico Berkes, and Ugo Panizza found a negative effect on output growth when credit to the private sector reaches 104-110% of GDP. The strongest adverse effects are for credit over 160% of GDP.
The second is the 2011 BIS study authored by Cecchetti, Mohanty, and Zampolli. They found that private debt levels become “cancerous” (in BIS economic advisor Cecchetti’s own words) at 175% (90% for corporations and 85% for households)—just slightly more than the UNCTAD study.
When you add our private debt to GDP ratio of 273 percent to our federal debt to GDP ratio of 101 percent, you get a grand total of 384 percent.
This is how we have funded the false prosperity of the past couple of decades. Essentially, we have been putting our good times on a credit card.
And as anyone that has ever tried to live on credit knows, the good times eventually run out.
But this is what the Federal Reserve was designed to do. It was designed to get the U.S. government trapped in a debt spiral from which there would never be any escape.
It is not an accident that our national debt has gotten more than 5000 times larger than it was when the Fed was originally created. This is what the bankers wanted the system to do.
They wanted a system that would extract wealth from all of us through taxes, transfer it to the government, and then transfer it to them through interest payments.
We never needed a central bank, we never needed the IRS and we never needed an income tax. America would be doing just fine without any of them.
But instead, America chose to go down the path of collectivization and central planning, and now we are heading toward the biggest economic disaster in the history of mankind.
This is no time to be complacent. Massive economic problems are erupting all over the globe, but most people seem to believe that everything is going to be just fine. In fact, a whole bunch of recent polls and surveys show that the American people are starting to feel much better about how the U.S. economy is performing. Unfortunately, the false prosperity that we are currently enjoying is not going to last much longer. Just look at what is happening in Europe. The eurozone is now in the midst of the longest recession that it has ever experienced. Just look at what is happening over in Asia. Economic growth in India is the lowest that it has been in a decade and the Japanese financial system is beginning to spin wildly out of control. One of the only places on the entire planet where serious economic problems have not already erupted is in the United States, and that is only because we have “kicked the can down the road” by recklessly printing money and by borrowing money at an unprecedented rate. Unfortunately, the “sugar high” produced by those foolish measures is starting to wear off. We are going to experience a massive amount of economic pain along with the rest of the world – it is just a matter of time.
But for the moment, there are a lot of skeptics out there.
For the moment, there are a lot of people that are declaring that the problems of the past have been fixed and that we are heading for incredibly bright economic times ahead.
Unfortunately, those people appear to be purposely ignoring the economic horror that is breaking out all over the globe.
The following are 18 signs that massive economic problems are erupting all over the planet…
#1 The eurozone is now in the midst of its longest recession ever. Economic activity in the eurozone has declined for six quarters in a row.
#2 Italy’s economy has now been contracting for seven quarters in a row.
#3 Industrial production in Italy has fallen for 15 months in a row. It has now fallen to its lowest level in about 25 years.
#4 The number of people that are considered to be “seriously deprived” in Italy has doubled over the past two years.
#5 Consumer confidence in France has just hit a new all-time low.
#6 The number of unemployed workers seeking a job in France has hit a brand new all-time record high. Many unemployed workers in France are utterly frustrated at this point…
“I’ve sent CVs everywhere, I come to the unemployment agency every day, for 3 or 4 hours to look for work as a truck driver and there’s never anything,” said 42-year old Djamel Sami, who has been unemployed for a year, leaving a job agency in Paris.
#7 Unemployment in the eurozone as a whole has just hit a brand new all-time record high of 12.2 percent.
#8 Youth unemployment continues to soar to unprecedented heights in Europe. The following is from an article that was recently posted on the website of the Guardian that detailed how bad things are getting in some of the worst countries…
In Greece, 62.5% of young people are out of work, in Spain it’s 56.4%, then Portugal with 42.5%, and then Italy with 40.5%.
#9 Youth unemployment is being partially blamed for the worst rioting that Sweden has seen in many years. The following is how the Daily Mail described the riots…
Sweden is reeling after a third night of rioting in largely run-down immigrant areas of the capital Stockholm.
In the last 48 hours violence has spread to at least ten suburbs with mobs of youths torching hundreds of cars and clashing with police.
It is Sweden’s worst disorder in years and has shocked the country and provoked a debate on how Sweden is coping with youth unemployment and an influx of immigrants.
#10 An astounding 10 percent of all banking deposits were pulled out of banks in Cyprus during the month of April alone.
#11 Economic growth in India is the slowest that it has been in an entire decade.
#12 Suddenly Australia is experiencing some tremendous economic challenges. The following quotes are from a recent Zero Hedge article…
-“We’re seeing a much sharper contraction in the Australian economy than we’d anticipated four or five months ago”. Coffey MD, John Douglas. The engineering group has seen its shares, which traded above $4 in 2007, hit 10c last week.
-“By 10am, the Fitness First gym in the city is packed full of brokers who’ve had a gutful of sitting at their desk doing nothing – salary cuts are starting and next it will be jobs” Perth broker
-“Oh mate, the funding market is dead. You are now seeing a few deeply discounted rights issues for those that are reaching desperate levels ….. liquidity has completely disappeared” Perth broker
#13 The financial system in Japan is beginning to spin wildly out of control. The Japanese stock market has now declined about 15 percent from the peak, and many believe that the yen will continue to get weaker and that interest rates in Japan will start to rise significantly.
#14 Global cash flow is declining at a rate not seen since the last recession. This indicates that we could be headed for a global credit crunch.
#15 Real wages continue to decline in the United States. Even though we are being told that the U.S. is experiencing an “economy recovery”, real weekly earnings have declined from $297.79 in 2010 to $295.49 in 2011 to $294.83 in 2012. (The preceding calculation is based on 1982-1984 dollars)
#16 Wall Street is buzzing about the fact that “the Hindenburg Omen” appeared at the end of last week. So exactly what is “the Hindenburg Omen”? The following are the criteria that are used to determine whether it has appeared or not…
1. The daily number of NYSE new 52 Week Highs and the daily number of new 52 Week Lows must both be greater than 2.2 percent of total NYSE issues traded that day.
2. The smaller of these numbers is greater than or equal to 69 (68.772 is 2.2% of 3126). This is not a rule but more like a checksum. This condition is a function of the 2.2% of the total issues.
3. That the NYSE 10 Week moving average is rising.
4. That the McClellan Oscillator ( a market breadth indicator used to evaluate the rate of money entering or leaving the market and interpretively indicate overbought or oversold conditions of the market)is negative on that same day.
5. That new 52 Week Highs cannot be more than twice the new 52 Week Lows (however it is fine for new 52 Week Lows to be more than double new 52 Week Highs).
When the Hindenburg Omen makes an appearance, it supposedly means that the U.S. stock market is likely to experience a serious decline within the next 40 days.
#17 As I wrote about the other day, the SentimenTrader Smart/Dumb Money Index is now the lowest that it has been in more than two years. That means that lots of “smart money” has been getting out of the market and lots of “dumb money” has been pouring in.
#18 Margin debt on the New York Stock Exchange has set a new all-time high. The following is from a recent Market Oracle article…
Margin debt—that’s the amount of money borrowed to purchase stocks—on the New York Stock Exchange (NYSE) reached its all-time high in April. Margin debt on the NYSE registered at $384.3 billion as the key stock indices hit new record-highs. (Source: New York Stock Exchange web site, last accessed May 29, 2013.) The highest margin debt ever reached prior to this was in July of 2007, when it stood just above $381.0 billion. At that time, just like today, the key stock indices were near their peaks and “buy now before it’s too late” was the prominent theme of the day
Whenever margin debt spikes like this, a stock market crash almost always follows. If you doubt this, just check out the chart in this article.
Wall Street has had a good couple of years, but it has been a “false prosperity” that has been pumped up by reckless money printing by the Federal Reserve. Just like all of the other stock market bubbles that we have seen in recent years, this one is going to burst too. And as Marc Faber recently pointed out, this bubble has been particularly beneficial to the wealthy…
The Fed has been flooding the system with money. The problem is the money doesn’t flow into the system evenly. It doesn’t increase economic activity and asset prices in concert. Instead, it creates dangerous excesses in countries and asset classes. Money-printing fueled the colossal stock-market bubble of 1999-2000, when the Nasdaq more than doubled, becoming disconnected from economic reality. It fueled the housing bubble, which burst in 2008, and the commodities bubble. Now money is flowing into the high-end asset market – things like stocks, bonds, art, wine, jewelry, and luxury real estate.
Money-printing boosts the economy of the people closest to the money flow. But it doesn’t help the worker in Detroit, or the vast majority of the middle class. It leads to a widening wealth gap. The majority loses, and the minority wins.
The fact that the U.S. stock market has set new all-time record high after new all-time record high in recent months means very little. At this point, the stock market has become completely divorced from economic reality. When this current bubble bursts, the adjustment is going to be very painful. Wall Street will likely whine and complain and ask for more bailouts, but they may find that authorities are not nearly as sympathetic this time.
Much of the rest of the world is already experiencing the next major wave of the economic collapse. Reckless money printing by the Fed and reckless borrowing and spending by the federal government may have delayed the inevitable in the United States for a little while, but those measures have also made our long-term problems even worse.
There was one piece of advice that Ben Bernanke included in his commencement speech to students at Princeton recently that I thought was particularly ironic…
“Don’t be afraid to let the drama play out.”
Will he take his own advice when the next great financial crisis strikes the United States?
That seems very unlikely.
Unfortunately, things are not going to be so easy to fix this next time.
What happened back in 2008 was just a preview.
What is coming next is going to absolutely shock the world.